After long years of rates near zero, fixed-income investors are happy to see opportunities as rates on treasuries return to normal. Vivien Lou Chen reports in MarketWatch:
Stock and bond markets reacted strongly to the minutes from the Federal Reserve’s July 25-26 meeting on Wednesday because of the signal being provided about policy makers’ views on long-run real interest rates, according to Colas.
The minutes suggest the policy-setting Federal Open Market Committee “wants to see higher real yields across all maturities to slow growth and contain inflation,” he said. “All this will contribute to near-term equity market uncertainty, dampening investor confidence/valuations.”
Real long-term rates of 2%-3%, or levels seen in 2006-2007, could also reduce consumption and investment by increasing the cost of consumer debt and corporate cost of capital.
The Treasury market appears to be in the early stages of a “higher-for-longer” environment for U.S. rates, one that might be jarring for investors long accustomed to easy borrowing. Both the 10-year Treasury and 10-year TIPS yields are now in territories which have historically been regarded as normal for the U.S. economy.
“One could say that Treasury yields are simply returning to their natural equilibrium,” said Christoph Schon, the U.K.-based senior principal of applied research at Qontigo, a financial analytics and index provider. A nominal 10-year yield of 4.3% “seems appropriate” when considering current inflation expectations and where Treasury rates have historically traded.
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